Write a short note on trade credit and also mention its merits and limitations

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cbse

#1

Trade credit refers to the credit provided by one firm to another for the purchase of goods and services. It is a source of short-term finance and facilitates purchase of goods and services without immediate payment.
Advantages (Merits):

  1. It promotes the sales of an organisation.
  2. It is a continuous and convenient source of funds.
  3. It does not create any charge on the assets of the business.
  4. This source is very easily available when the credit worthiness of the customers is known to the sellers.
    Limitations:
    1.Through this source only limited amount of funds can be raised.
  5. This source is generally costly as compared to other
    sources.
  6. A loss of cash discount is also noticed.
  7. A firm may indulge in overtrading due to easy availability and flexibility of this source. This adds risks to the firms.